1. Geopolitical volatility is rewriting the global inflation narrative, with a crucial shift occurring in mid-to-downstream supply contraction that markets are overlooking. Since July, fluctuating geopolitical tensions have sent oil prices surging, while a contraction in mid-to-downstream supply is creating unexpected price stickiness. As these forces collide, the trajectory of inflation this year will likely defy expectations, presenting a complex pattern of multiple peaks. [para. 1][para. 2]
2. Oil prices were temporarily depressed by the signing of a U.S.-Iran memorandum in mid-June to around $70 per barrel, driven by hopes of reopened waterways. However, with negotiations facing significant variables and global crude inventories plunging to historic lows since June, the supply landscape has tightened dramatically. Exacerbated by renewed disruptions in the Strait of Hormuz, oil prices have once again breached the $90 per barrel mark. International oil prices typically lead domestic PPI by about half a month, meaning this volatility will result in a low PPI reading for July followed by a sharp increase in August. Consequently, PPI is expected to form a double peak this year, with the second peak hitting roughly 4.2% in September. Upward risks to oil prices remain significant, including historically low inventories, the expiration of strategic petroleum reserve release plans, rebounding summer travel demand, and ongoing geopolitical disruptions. [para. 3][para. 4][para. 5][para. 6]
3. Beyond oil, markets are severely underestimating the inflationary impact of supply-side contraction. The previous shock of high oil prices devastated the number of enterprises and employment within the petrochemical supply chain, accelerating a broad supply clearing process. Operating rates, actual inventories, and employment growth in mid-to-downstream sectors are currently at historic lows, creating a persistent supply shock that is already making PPI surprisingly resilient. Historically, whenever mid-to-downstream supply contracts, it triggers broad price increases across the entire chain that last anywhere from six to 12 months. This dynamic will not simply vanish if spot oil prices fall. The current situation mirrors the rapid oil price hikes of 2017 and 2021-22, where downstream prices remained stubbornly high even as upstream costs cooled. [para. 7][para. 8]
4. Leading indicators suggest inflationary pressure will persist. Before the current oil price spike, mid-to-downstream cost ratios had already reached a historically high 87%, magnifying the supply contraction. With projects under construction acting as a one-year leading indicator for fixed-asset investment, a projected negative growth rate in late 2025 points to a decline in fixed-asset investment by the second half of 2026, further supporting inflation. The transmission from producer to consumer prices, moving from raw materials to consumer goods and finally to core CPI, operates with a four-month lag and is already accelerating. The rapid rise in production materials earlier this year has pushed up the non-food consumer goods PPI, lifting core goods CPI to a relatively high 0.6%. [para. 9][para. 10]
5. Crucially, the artificial intelligence boom is reinforcing this transmission. AI-driven inflation impacts PPI both directly, through surging prices for electronic components and computer equipment, and indirectly, by stimulating investment that drives up the cost of non-ferrous metals. It is estimated that AI-related inflation is contributing nearly 2.3 percentage points to current PPI year-over-year growth and 0.2 percentage points to CPI growth as memory chip price hikes translate to more expensive consumer electronics. [para. 11]
6. Ultimately, the combination of surging oil prices and an accelerating contraction in downstream supply points to a double peak for PPI and a triple peak for CPI. While sluggish terminal consumer demand and a high base effect for gold prices will likely drive CPI downward overall in the second half of the year, these supply-side shocks will amplify monthly volatility. Expect CPI to spike again to roughly 1% in September, completing an M-shaped trajectory for the year with three distinct peaks in February, April-May, and September. [para. 12]
7. Zhao Wei is chief economist at Shenwan Hongyuan Securities. The views expressed in third-party articles are those of the authors and do not necessarily reflect the positions of Caixin. Contact editor Lu Zhenhua. [para. 13][para. 14][para. 15]
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